What is floating stock?

According to her, it's a simple, subtle metric that can often tell you everything you need to know.

Floating stock is similar. Oftentimes, it doesn't say much at all about a company. But when it does say something, it can reveal a treasure trove of info.

So let's investigate floating stock.

• What is floating stock?
• How is it calculated?
• What's the difference between low float and high float?
• And why should investors pay attention to floating stock?

The short version

• Floating stock is the number of shares of a company available to trade on the market.
• Floating shares are calculated by subtracting the restricted stock and closely held shares from shares outstanding.
• Low float stocks have fewer shares available on the market, while high float stocks have a lot. Most stocks are high float.
• If a stock is low float it is usually cheaper and more volatile.

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What is floating stock?

Floating stock (or “float”) is the number of shares of a stock that are currently available for trade in the open market.

Float is typically displayed as a literal number of shares. If you search for a stock on Yahoo! Finance and click the Statistics tab, you can see the float hiding under Share Statistics.

Here, for example, is Google's float:

So, hang on a minute — if floating stock is buried so deeply in a stock quote, is it really all that important?

Float is often buried because most stocks are high float. But when a stock happens to be low float, that can be a really big deal.

Low float stocks are defined as having very few shares available on the open market. Another way to think of them is “stocks with low inventory.”

Though that may sound pretty innocuous, having low float makes a stock act much differently a high float stock.

For one thing, stocks with low float generally have higher volatility than stocks with high float. Investors in low float stocks may struggle to find buyers or sellers. Conversely, if demand outstrips supply, the value of your low float stock could rocket skyward.

How does floating stock work?

You can calculate floating stock by using the following formula:

Floating stock = shares outstanding – restricted stock – closely held shares

Here's a quick refresher of those terms, if you need it:

Shares outstanding (or “outstanding stock”) refers to all of a company's stock that's currently held by someone. That includes shares owned by investors, executive leadership, company insiders and others.

Restricted stock refers to stock reserved for incentives such as compensation or golden parachutes for executives and other company leadership. It's “restricted” because it's nontransferable until some sort of milestone is met, such as retirement.

Closely held shares are shares that can be sold, but aren't being sold. They're considered off-market because they're being gripped tightly by company leadership trying to maintain control, institutional investors with long-term plans, etc.

Lastly, float does not include shares that haven't yet been issued. But when a company releases more stock into the open market, float increases.

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Example of a floating stock

Let's say a company has an IPO (initial public offering) to raise capital. The company has a $100 million valuation, so the board authorizes 10 million shares at $10 each.

• Two million shares are being withheld for issue at a later date.
• Two million shares are in the company ESOP (Employee Stock Ownership Plan).
• Three million shares are being held tight by institutional investors or company leadership.

10 – 2 – 2 – 3 = 3 million shares. The float percentage is the float (3 million) divided by the total shares outstanding (10 million). In this example, it equals 30%.

In essence, float is the shares of a company that are actively trading hands on the free market. It's shares outstanding minus shares that can't (or won't) be traded.

What's the difference between a low float and a high float stock?

As I mentioned earlier, low float stocks can be more volatile than high float stocks. What defines each?

Low float stocks

Low float stocks have relatively few shares available for trade on the open market.

The threshold for low float is subjective. But most investors agree with the following definition:

• A float percentage of outstanding shares below 20%, or
• Fewer than 10 million shares in float

As an example, American Realty Investors, Inc. (NYSE:ARL) is a very low float stock (at the time of this writing). With 16.15 million shares outstanding and a float of just 1.42M, its float percentage is just 8.8% — that's limbo champ low.

High float stocks

High float stocks like Alphabet, Inc. (GOOG) have tons and tons of shares available for trade. They have plenty of “inventory” — so even on a day of intense trading, there's plenty of shares to go around. This means the spread on high float stocks is usually pretty tight.

Institutional investors, including pension funds and insurance companies, like high float stocks because they can scoop up tons of shares without having a huge impact on the share price.

As you've probably figured out, low float stocks are much more special and interesting than high float stocks — so let's dive deeper and investigate their unique characteristics.

5 features of low float stocks

What are the main characteristics of low float stocks? And do day traders prefer them to high float stocks?

1. Low float stocks are cheap

To start, low float stocks have a low, affordable share prices. You don't have to worry about partial shares when you can stack up whole shares for around $5 to $20 a pop. Many penny stocks are low float.

Low float shares tend to cost less than a burrito because…

2. They tend to have a very small market cap

In most cases, low float stocks are low float because the leadership and other company insiders are gripping tightly to their shares — a practice more common inside smaller companies.

But as companies grow, being their own majority shareholder becomes less sustainable. Capital needs to be raised, early investors seek an exit, etc.

That's why you won't see many (or any) Blue Chip stocks in a low float portfolio.

3. They're highly volatile

There's an inverse correlation between float and volatility. When fewer shares are available to the public, the potential impact of a single trade becomes much greater.

For example, let's say you know a stock has 10 million outstanding shares and eight million are restricted — leaving a very low float of two million. Then one of the founders decides to sell one million closely held shares.

This single trade increases the float by 50% overnight, which could wreak havoc on prices — especially if demand outstripped supply prior to the trade.

4. They're borderline illiquid

What's worse than selling low? Not being able to sell at all.

Low float doesn't necessarily mean high demand, low supply. In fact, it can often mean no demand, low supply. Unlike high float shares, your low float shares may simply not have any interested buyers when you're ready to sell.

Yes, volatility and illiquidity are big red flags for any keen-eyed investor. And yet, day traders gobble up low float stocks because…

5. The upside could be huge — even overnight

The upside potential for all small cap stocks can be big, since small companies can grow quickly and double their P/E ratio faster than a big, lumbering Blue Chip stock.

But the share price of a small cap low float can explode even faster due to the added rocket fuel of limited supply.

Here's a very common example: An obscure, low float pharmaceutical stock has been hovering around $3.60 a share for years. Overnight, their latest miracle drug gets FDA approval.

As the former no-name company seizes headlines, investors pour in — only to discover that the float is just 130,000 shares. In this case, demand vastly outstrips supply, and the market is going to make the price of this one skyrocket.

If you have some of those shares and are willing to sell, you're in for a windfall.

Why floating stock is important for investors

For high-risk investors, especially day traders, low float represents an exciting opportunity to get in on the ground floor.

But what about mid- to low-risk investors? If you're considering a stock, what's there to learn from the float?

Regardless of your risk tolerance, the key takeaway is this:

Float and volatility are inversely correlated.

Broadly speaking, a high float is a green flag. It signals stability. A high float means shares are trading freely in the open market, volatility is low, and your ability to find a buyer when you sell your position is high. High float is good for long-term investing.

Conversely, low float is a yellow flag signaling caution. A low float should make you go, “Hmm…” and investigate further. Why is this stock low float? Who's holding on to it and why?

For example, after investigating a particular stock, you discover that the CEO is a serial entrepreneur who tends to exit once her ventures reach a certain market cap. She may be just about to flood the market with 1.5 million shares, so it may not be the right time to invest in this low floater (or maybe you could short it).

On the other hand, maybe you discover that an Australian battery manufacturer is performing a buyback, a practice where companies purchase their own shares to take them off the free market — at least temporarily.

Companies typically do this to a) consolidate control, or b) save cash on dividends. Either way, buybacks usually lead to stronger performance (PDF), which may indicate it's a good time to buy, hold and ride the wave.

Find out more: How to do stock market research

Conclusion

Floating stock is a simple, oft-neglected and yet highly revealing metric hiding in a stock quote.

Most stocks you research will be high float — stable stocks, with healthy trading activity and plenty of supply on the market.

But one day soon you'll bump into a low float stock, with curiously few shares on the market. It could be a major red flag, or signal a diamond in the rough.

Either way, you can gather a ton of information from a company's float — information that other traders may not consider — and that's the key to smart investing.